New Zealand: The Multilateral Agreement On The Liberalisation Of International Air Transportation

New Zealand is a party to some forty bilateral air services agreements that govern our airlines’ traffic rights and market access in other countries. Each of our 40 or so treaty partners in turn has a suite of its own bilateral agreements with other countries.

Around Asia and the Pacific, and across the globe, a complex web of hundreds of these bilateral agreements is in place. No two of them are completely alike. Each has its own administrative machinery that costs governments money to administer, and airline industries money to comply with. Some of the agreements are highly restrictive and grant only the most basic of traffic rights, whereas in others, the parties accord each other a full range of rights and privileges.

Could one multilateral agreement do the job of many bilateral agreements? Would this simplify the regime and reduce compliance and administrative costs? And if a number of key countries were prepared to sign a very liberal multilateral agreement, offering up improved access to their own markets, would this in turn encourage even more countries to come on board?

New Zealand, the United States, Singapore, Chile and Brunei all thought that the answer to these questions was yes. The result is the Multilateral Agreement on the Liberalisation of International Air Transportation - the first ever multilateral air services agreement - which was signed by those countries in Washington on 1 May this year.

This presentation outlines how this new agreement will work, and shares some background on the negotiation process. It also outlines the benefits that should flow from this agreement once it enters into force – which will hopefully not be too far into the future.

What are air services agreements?

Air services agreements are binding international treaties between sovereign States. Their main purpose is the mutual exchange between countries, of rights for each other’s airlines to overfly, stop over in, and transport passengers and cargo to, from and within their territories. These rights are known as "traffic rights" or "freedoms". There are a number of levels of "freedom" that countries can grant each others’ airlines in air services agreements. In fact there are nine generally recognised freedoms, which are conveniently called the first, second, third, fourth, fifth, sixth, seventh, eighth, and ninth freedoms.

Freedom

Description

Example using Australia and New Zealand

First freedom

The right granted by country A to country B, for country B’s airlines to fly over country A’s territory without landing.

NZ airline can overfly Australian airspace.

Second freedom

The right granted by A to B, for B’s airlines to land in A’s territory for non-traffic purposes (eg refuelling, maintenance, etc).

NZ airline can land in Australia to re-fuel.

Third freedom*

The right granted by A to B, for B’s airlines to carry traffic from B to A.

NZ airline can carry traffic from New Zealand to Australia.

Fourth freedom*

The right granted by A to B, for B’s airlines to carry traffic from A to B.

NZ airline can carry traffic from Australia to New Zealand

Fifth freedom*

The right granted by A to B, for B’s airlines to carry traffic between A and any other country, provided that the flight in question is part of a service that originates or terminates in B’s territory.

NZ airline can carry traffic from Australia to any other country (and vice versa), but only if the flight originates or terminates in New Zealand.

Sixth freedom*

The right granted by A to B, for B’s airlines to carry traffic between A and any other country via a point in B’s territory.

NZ airline can carry traffic from Australia to any other country, flying via New Zealand (and vice versa).

Seventh freedom*

The right granted by A to B, for B’s airlines to carry traffic between A and any other country, without the requirement (found in 5th and 6th freedoms) that the service also touch down in B’s territory.

NZ airline can carry traffic between Australia and any other country, without any need to touch down in New Zealand (ie NZ airline could be based in Australia).

Eighth freedom*

The right granted by A to B, for B’s airlines to carry traffic between two points inside the territory of A, so long as the service forms part of an international flight. (Known as "cabotage").

NZ airline can carry traffic from, say, Sydney to Perth (in competition with domestic airlines), so long as the flight originated, or will continue overseas.

Ninth freedom*

The right granted by A to B, for B’s airlines to carry traffic between two points inside the territory of A (with no requirement that the service form part of an international flight). (Known as pure cabotage).

(Qantas are in fact operating a pure cabotage operation at present in New Zealand under the Single Aviation Market agreement between New Zealand and Australia).

*Third freedoms through to ninth freedoms can be for passengers or cargo only, or for both.

The traffic rights or freedoms granted in air services agreements often have frequency or capacity limits. There may be a limited number of flights allowed per week There may also be a limited number of passenger seats allowed in any given time period.

Also, air services agreements often place strict limitations on the airlines that can qualify for the access granted under an air services agreement – normally this is in the form of a "substantial ownership and effective control’’ requirement. In other words, country A will not allow country B’s airlines to be "designated" under an air services agreement (and therefore qualify for the traffic rights granted in the agreement) unless those airlines are "substantially owned" and "effectively controlled" by nationals or the government of country B.

We have of course heard a lot about this during the course of this year in relation to the various proposals for increased foreign ownership in Air New Zealand. Because of the national ownership and control restrictions in some of our existing bilateral air services agreements, there are some limits on how much ownership and control of Air New Zealand can be vested in overseas interests. If ownership and control of Air New Zealand doesn’t stay within the boundaries set in one or more bilateral agreements, then the risk is that Air New Zealand will no longer qualify for "designation" under those agreements, and will therefore no longer be able to benefit from the traffic rights granted.

Air services agreements also govern rights and obligations regarding important related matters such as airline sales and marketing; setting up offices; use of airline reservation systems; codesharing and fare pricing; servicing of aircraft; customs and immigration procedures; and taxes. All of these things can affect market access and fair competition for airlines in foreign countries. For example, the ideal is for an air services agreement to provide for "national treatment" in respect of customs, immigration and taxes. That is to say, the agreement will ideally state that countries agree to treat each others’ airlines no less favourably than they treat their own airlines in relation to customs and immigration procedures, and in respect of taxes and duties.

Time for an "open skies plus" multilateral air services agreement.

New Zealand has for a long time advocated negotiating a high quality multilateral air services agreement. The idea gained further momentum and support in the late 1990’s through APEC, and as a result of this, a small group of countries, led by the United States and New Zealand, commenced negotiation of a multilateral agreement in the year 2000.

The US sought to use their model bilateral "open skies" agreement as a basis for the multilateral agreement. The US "open skies" model grants rights up to and including sixth freedom for passengers and cargo, and up to seventh freedom for cargo only.

New Zealand has a number of bilateral agreements that go further than the US model by providing seventh and eighth freedoms for both passengers and cargo (including with Brunei and Singapore). Most recently, the Single Aviation Market agreement between Australia and New Zealand provides up to and including ninth freedom rights.

As a matter of trade and air transport policy, New Zealand wanted the most liberal regime achievable, and therefore wished to build full seventh and eighth freedoms into the multilateral agreement. Furthermore, we obviously did not want a less liberal multilateral agreement to supersede our existing more liberal bilateral agreements with with Brunei, Singapore and Australia.

At the same time, others at the negotiating table made it clear that they could not (at least for the time being) sign on to a multilateral agreement that contained seventh passenger and eighth freedom rights.

The Protocol

New Zealand achieved a compromise solution during the negotiations – we proposed and drafted a Protocol to the Agreement for those parties who wished to go further than the US model open skies freedoms that are now incorporated in the main body of the Agreement. The Protocol allows those party to it (who must also be parties to the main Agreement) to exchange full seventh and eighth freedom rights as between themselves.

Some tough negotiation and complex drafting was needed during the final meeting of the parties in Hawaii last November in order to get the balance right between the various interests around the table. For example, a number of countries wished only to exchange the additional seventh and eighth freedoms together as a package in the Protocol (ie "all or nothing"). Others wanted the ability to exchange the additional seventh passenger freedoms only, without the requirement to also exchange eighth freedoms.

It is easy to understand, for example, how "one airport States" like Singapore on the one hand, and countries with multiple airports and large domestic markets like the US on the other, will have very different economic interests when it comes to trading off these additional freedoms. A simple illustration would be an exchange of eighth freedom cabotage rights between Singapore and the US - this on its own would be a very one-sided deal, since Singapore has no domestic air traffic market for US carriers to access, but Singaporean carriers could access the large US domestic market. Conversely, because of Singapore’s geographical location, seventh freedom rights out of Changi airport are a very valuable and sought-after commodity.

The formula arrived at through the Protocol (after quite a lot of horse-trading!) makes the Agreement flexible enough to cater for each party’s particular interests. Basically how the Protocol works is this:

any country that is party to the main agreement can join the Protocol;

in Article 2 of the Protocol, the parties agree to grant each other seventh passenger freedoms andeighth freedoms;

however, Article 3 allows any party to make a reservation with respect to eighth freedoms when it joins the Protocol. (Effectively therefore, a party making a reservation will only offer seventh passenger freedoms);

where a party makes such a reservation, each of the other parties to the protocol who have notmade such a reservation can then either:

elect to apply the reservation reciprocally between itself and the reserving party; or

elect that the Protocol shall not apply between itself and the reserving party.

The practical effect of this formula is that:

first, the "default" position is that all Protocol parties will exchange both seventh passenger and eighth freedoms. A party will actively have to make a reservation if it wants to limit itself to exchanging seventh passenger freedoms;

secondly, other parties who have made no reservations (ie have offered "all") have the luxury of choice:

they can elect to limit themselves to a reciprocal exchange of seventh passenger freedoms only with the reserving State; or

they can make no exchange of rights at all with the reserving party under the Protocol. Countries that want to treat with others on an "all or nothing" basis in respect of seventh passenger and eighth freedoms, can therefore do so.

The formula therefore provides for flexibility on a case-by-case basis between:

countries that would only ever envisage being able to exchange up to seventh passenger freedoms;

those who are ready to go further, but only on all "all or nothing basis" (ie won’t offer seventh passenger freedom without also getting eighth freedom); and

those who can go as far as eighth freedoms, but are also prepared to exchange only up to seventh freedoms with others if that is all they can offer.

New Zealand has signed the Agreement and Protocol without reservation, meaning that we will be willing to exchange up to and including eighth freedoms with any of the other parties.

More flexible airline ownership requirements

A significant outcome from the negotiations – something that New Zealand pushed hard to achieve – was to free up the ownership requirements for an airline to be "designated" by a party (and therefore enjoy the rights granted) under the Agreement. The text agreed is a significant advance on the provisions used to date in US "open skies" agreements (including the existing bilateral agreement between the US and New Zealand).

The new agreement’s key requirements are simply that:

"effective control" of the airline being designated is vested in the designating party or its nationals; and

the airline is incorporated or has its principal place of business in the territory of the designating party.

Unlike the US bilateral model (and unlike many of New Zealand’s other bilateral agreements) the Multilateral Agreement has no "substantial ownership" requirement. Removing the substantial ownership requirement is potentially of benefit to smaller countries like New Zealand where the capital base is more limited, and where airlines need the ability to access overseas equity in order to grow and compete internationally. As a result, under the new Agreement, New Zealand airlines will have more scope to use foreign capital without fear of losing their "designation" (and therefore their access to the markets of the other parties to the agreement).

Article 3 on ownership requirements was one of the most difficult provisions of the Agreement to finalise, given the very different interests of the governments represented around the negotiating table. The domestic industries of some countries around the table had a strong influence on their negotiating position. One of the parties at the table insisted on the inclusion of an exception that would allow it to refuse designation of airlines put forward by other parties if those airlines were substantially owned by its own nationals. The reason for this was because that party’s domestic industry did not want its airlines setting up a base in lower cost countries overseas, and then using the new Agreement to gain access back into its own market.

Other benefits of the new Agreement

The new Agreement has several other features which prevent restriction or discrimination and which will further liberalise air transportation between the parties. These reflect "best practice" from contemporary bilateral agreements, and include:

a general rule that no frequency, capacity, or aircraft type restrictions are allowed;

a provision that countries must not treat the airlines of another party any less favourably than their own with respect to customs, quarantine, or immigration procedures;

parties have a general right under the Agreement to establish offices; place their own ground staff; and do their own ground handling of their airlines’ aircraft in each others’ territory;

the right to code-share, block space, and make lease arrangements with the airlines of any other party or APEC member is generally unrestricted;

there is an exemption (on a reciprocal basis) from all customs duties and charges otherwise payable for goods and services used in connection with air transportation;

there is rather complex provision to ensure that computer reservations systems are not used as a means of restricting competition in the marketplace; and

the Agreement contains a state-of-the-art consultation and binding dispute settlement mechanism in the event of a dispute between any of the parties.

These features should lead to greater business opportunities for the airlines of the parties and their related industries. As more countries join the Agreement in future, these opportunities should grow even further.

The Single Aviation Market with Australia

Australia was a participant in the negotiations of the Multilateral Agreement (Japan also sent some non-participating observers). Australia was the only participant that did not in the end sign up to the finalised text.

One issue for New Zealand, should Australia eventually join the Multilateral Agreement, will be the status of our Single Aviation Market Agreement. The Single Aviation Market Agreement with Australia in fact goes even further than the Multilateral Agreement and its Protocol, since under the Single Aviation Market, Australia and New Zealand have exchanged ninth freedoms or pure cabotage (the reason why Qantas Australia is able to operate domestic flights in New Zealand at present).

The Multilateral Agreement provides that where it enters into force between any two countries with a pre-existing bilateral agreement, then the bilateral agreement will be suspended for so long as the Multilateral Agreement remains in force between those two countries.

If Australia and New Zealand both become party to the Multilateral Agreement, this would mean that the Single Aviation Market Agreement would be suspended. In the absence of any other arrangements, there would no longer be a legal basis for the exchange ninth freedoms between Australia and New Zealand.

There are, however, a number of ways to address this issue. One would be for Australia and New Zealand to sign a short agreement reviving all or part of Single Aviation Market Agreement as soon as Australia ratified the Multilateral. Such a subsequent agreement would, under international treaty law, override the suspension provision in the Multilateral Agreement. An agreement reviving the SAM would also be an agreement that was subsequent to the Multilateral Agreement. The Multilateral Agreement only suspends pre-existing bilateral agreements.

In other words, whether Australia joins the Multilateral Agreement or not, it will be possible for the Single Aviation Market Agreement to continue.

What next?

The Agreement will not enter into force until it is ratified, or signed not subject to ratification, by four of the five signatory parties. The Protocol requires just two parties to enter into force.

Domestic treaty ratification processes can take some time, however the US, Singapore and Brunei all signed the Agreement not subject to ratification, so only one of either New Zealand or Chile (both of whom signed subject to ratification) now needs to ratify the Agreement for it to enter into force.

The Transport and Industrial Relations Select Committee considered New Zealand’s ratification of the Agreement on the 28th of November 2001. The Select Committee is taking a week to consider the matter, and is likely to approve ratification at its next meeting. We can therefore expect New Zealand’s ratification, and as a result the entry into force of the Agreement, before the end of this year.

While there are only five original signatory countries, after the Agreement and the Protocol enter into force they will be open for any other country which is a party to the four aviation security conventions to join. Three other countries have already expressed a strong interest in joining the Agreement once it enters into force.

A special mechanism has also been provided for Hong Kong and Taiwan (Chinese Taipei) to join. (These two are APEC member economies, but because they are not States, they are generally unable to sign international agreements in their own right).

After they ratify the new Agreement, the existing bilateral air services agreements between the parties will be suspended as noted above. That will mean the 10 existing bilateral agreements between the five original parties will be replaced with one multilateral. As each subsequent party joins, all of its bilateral agreements with those already party to the new Agreement will drop away (with the one likely exception of the Australia/New Zealand Single Aviation Market Agreement). Potentially hundreds of bilateral agreements could be replaced by the new Agreement. Fewer agreements will mean a simpler regime, and therefore lower compliance costs for both airlines and governments.

New Zealand volunteered to take on the depositary functions for the Agreement (one of only a few agreements for which we act in this capacity). This means that the New Zealand Ministry of Foreign Affairs and Trade and the Ministry of Transport will play an ongoing role in the implementation of the Agreement, and will be responsible for keeping official record of the Agreement itself; between whom it is in force; notifying parties of new signatories; and keeping a register of which airlines are "designated" under the Agreement.

A new era begins…

The new Agreement will provide the airlines of the parties greater flexibility in the way that they run their operations. It should also bring keener competition between these airlines and reduced compliance costs, which should in turn lead to reduced travel and freight costs for New Zealand businesses.

The more flexible ownership provisions will free up opportunities for New Zealand airlines to source capital from overseas markets.

The hope is that in time, a number of other countries will be encouraged to join the Agreement. The incentive to do so will be the immediate improved access to the markets of the countries already on board. International aviation relations would be greatly streamlined as a result, and at a highly liberalised level.

For New Zealand traders and travellers, more competition in the industry should result in efficiency gains and a wider range of options for air freight and passenger travel.

In the words of US Transportation Secretary Norman Mineta at the 1 May signing ceremony:

"With this historic agreement we are beginning to move beyond the current system of bilateral aviation agreements and into the international aviation environment of the 21st century. It is especially significant that this new agreement involves the growing, strategically significant Pacific Rim market. We invite other nations to join us in this effort to expand markets and break down barriers to trade."

*Murray Denyer is a Senior Associate in Minter Ellison Rudd Watts’ commercial/public law practice in Wellington. Up until the end of last year, he was a Senior Legal Adviser at the Ministry of Foreign Affairs and Trade, and was intimately involved in the drafting and negotiation of the Multilateral Agreement on the Liberalisation of International Air Transportation.

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